Answer with Explanation Please The cookie monster always consumes 3 packs of Ore

Question

Answer with Explanation Please

The cookie monster always consumes 3 packs of Oreos with 1 gallon of milk. If the price of Oreos decreases: oa The total effect will be positive, The substitution effect will be positive, and the income effect will be negative b The total effect will be negative, the substitution effect will be positive and the income effect will be negative O c The total effect will be positive, there is no substitution effect, the income effect will be positive O d The total effect will be negative, the substitution effect will be negative, there is no income effect

Explanation / Answer

Option (c).

This is a fixed proportion consumption - Oreos and Milk are consumed in a fixed proportion, irrespective of change in price of Oreos. So, as Oreo price falls, consumption of Oreo rises, and total effect is positive. Substitution effect is zero in case of fixed-proportion consumption. Therefore, Income effect (= Total effect - Substitution effect) will be positive.

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